UNCTAD/ITE/IIT/2005/10
UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT
Geneva
INVESTMENT PROVISIONS
IN
ECONOMIC INTEGRATION
AGREEMENTS
CHAPTER 6
UNITED NATIONS
New York and Geneva, 2006
VI. POLICY CHALLENGES
The number of EIIAs has increased greatly, especially since the 1990s, and there are
indications that it will continue to grow in the near future. Increasingly, EIIAs involve countries
with dissimilar economic characteristics and levels of development. A country contemplating
the negotiation of an EIIA faces a number of policy challenges, some of which are addressed
here.
First, a country wishing to provide investors with assurances of a favourable investment
climate may choose to do so through the inclusion of investment provisions in an EIIA or through
negotiation of another type of investment agreement. Therefore, an initial issue that arises
concerns the nature of the agreement. To some extent, the choice of instruments between an
EIIA and another type of IIA, for example BITs, may depend upon a country’s objectives in
negotiating the agreement. The goal of attracting selected foreign investment by offering certain
protections perhaps militates in favour of concluding a BIT type of agreement, while the goal of
seeking some level of real integration into the regional or global economy by lowering at least
some barriers to the international flow of capital may militate in favour of an EIIA. Certain
advantages of negotiating either EIIAs or BITs relate not to the type of agreement but to the
number of parties involved (UNCTAD, 1996). One of the main advantages of EIIAs vis-à-vis
other types of IIA is that, by addressing related economic transactions in a single framework,
these agreements can provide policy coherence and coordination in the economic area.
Indeed, as noted in the introduction, the inclusion of investment provisions as part of an
economic integration agreement covering trade and other types of economic transactions reflects
a desire to expand and deepen integration efforts among a number of economies by facilitating
investment flows between the parties. However, EIIAs’ approaches to investment issues vary
considerably and reflect different visions concerning the policies that will best promote the
economic welfare and development of the parties involved. A few EIIAs, particularly some of
the EIIAs that include only developing countries and that date from the period before the late
1980s, assume that economic development rests on providing preferential treatment to investment
from within the EIIA area. The majority of recent EIIAs, however, including many that involve
only developing countries, assume that liberalizing investment flows among different economies
will promote economic development by fostering the efficient allocation of resources and
augmenting the factors of production available to developing economies.
Second, once the decision to negotiate an EIIA has been made, a country faces a large
number of more specific policy choices relating to the inclusion of particular investment
provisions. Negotiation of an EIIA does not occur in a vacuum, but in the context of the 218
EIIAs that have already been concluded. Countries will inevitably come to the bargaining table
with expectations about what should be included, based on their prior negotiating history or on
the prior negotiating history of other States whose practices they consider instructive or wish to
emulate.
As has been shown in this study, there are strong regional patterns among EIIAs. For
example, a country preparing to negotiate an EIIA with the European Community or with EFTA
will very likely find investment liberalization, competition policy and intellectual property
protection high on the agenda. A country preparing to negotiate an EIIA with a country from the
Americas will find liberalization and intellectual property issues on the agenda, but also issues
involving many of the kinds of investment protection provisions found in a traditional BIT.
Many factors play a role in choosing a country with which to negotiate an agreement, but these
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Investment Provisions in Economic Integration Agreements
strong regional preferences are one consideration that may influence the choice of potential treaty
partners.
As noted also in the introduction, a key driving force behind the conclusion of EIIAs is
the insertion of national economies in the globalization process as a means of counteracting the
risk of economic marginalization. Thus, for many developing countries in particular, EIIAs may
be considered in themselves a development option. This consideration is of critical importance
because, as the process of economic integration through an EIIA intensifies, the lock-in effect of
the agreement would affect an increasingly wider range of policies and options, thus limiting the
policy space available for the adoption (or reconsideration) of appropriate development-oriented
strategies (UNCTAD, 2003a; Abugattas, 2004, p. 3). Thus, developing countries negotiating
EIIAs must consider how best to incorporate a development dimension into the agreements. At a
basic level, this raises the question of how an EIIA contributes to economic development, a
question that may not be answered in the same way for all countries. Some countries may be at a
stage of development where they regard rapid and extensive integration into the global economy
as an appropriate development strategy and will thus be willing to conclude high-standard
agreements that apply equally to all parties. Other countries may be at a stage of economic
development where integration must be slower and less extensive. They may wish to conclude
agreements that have a narrower scope, fewer or weaker commitments, more exceptions, and
transitional periods for implementation, and that apply differently to different parties at different
stages of development.
Thus the most important development challenge, especially for the negotiation of future
EIIAs involving countries at different levels of development, is to strike a balance between the
potential for the EIIA to increase investment flows and the flexibility of countries to pursue their
particular policy objectives in the light of their characteristics and changing circumstances.
Economic development is more complex than merely increasing the total quantity of resources or
ensuring their most efficient use. No country promotes economic development through a purely
liberal investment policy. As part of their development policies, countries need to balance a
series of potentially conflicting interests, some of which advocate in favour of excluding or
regulating foreign investment and others of which may advocate in favour of promoting or
protecting international investment flows.
This implies, among other things, that the EIIA needs to allow a sufficient level of policy
autonomy to national Governments of member countries to pursue their investment objectives.
This autonomy may be best reflected in a number of investment issues on which diverging views
exist. These include, notably, the substantive scope of the agreement, whether to afford the right
of establishment, the scope of the national treatment provisions, regulation of the use of
performance requirements and incentives, and competition policy, because they determine
whether, and to what extent, preferences can be given to domestic enterprises. The flexibility
instruments alluded to before may by specifically applied to these issues (UNCTAD 2003a, p.
173).
Furthermore, all countries have vital non-economic interests, which may be political,
social or cultural, that require priority attention. Investment issues, such as the scope of
expropriation actions and the recourse to investor-State dispute resolution, are sensitive because
they directly affect the sovereignty of the host country to regulate in the public interest and to
adjudicate on national public policy issues. As noted in chapter IV, various solutions to these
issues are reflected in existing EIIAs (UNCTAD 2003a, p.171).
Chapter VI
141
Indeed, the negotiation of investment provisions in an EIIA often involves difficult policy
issues that touch upon a range of social and environmental concerns traditionally thought to
belong to the domestic policy domain. As a result, EIIAs are becoming one of the most visible
manifestations of the growing internationalization of the domestic policy agenda. This implies
that EIIAs need to reflect in a balanced manner the rights and obligations of foreign investors and
states. Failure to address this balance, either within the same instrument or by establishing
bridges with other instruments, can have important development implications for host countries.
The key point is that economic development is the goal of every EIIA and development
concerns must therefore be addressed in every provision of the agreement, although for different
countries those concerns might well be addressed in quite different ways. Thus, the value of a
given EIIA must be assessed in the light of all the economic circumstances of each party and that
party’s own economic development policy.
Third, the growing proliferation of EIIAs and other investment agreements is resulting in
a multilayered and multifaceted web of interrelated investment rules and commitments, and this
is creating increasing difficulties for the interpretation and application of the rules (see the
spaghetti bowl figure (figure I.1)).
The types of difficulties that arise with the crossmembership of investment agreements of various types and at various levels have been illustrated
in the preceding chapter. Other difficulties arising from the complexity and ambiguity of
investment rules at all levels are even more difficult to tackle. Some relate, for example, to the
lack of comparability in the scheduling of commitments and reservations. Others refer to the lack
of consistency in the implementation of rules requiring national policy changes. Yet other
inconsistencies may arise from the application of MFN obligations, as MFN clauses differ in their
scope and coverage (UNCTAD, 2004a, pp. 237-238).
Several solutions exist to mitigate some of these problems. However, some of the
difficulties are likely to persist, and this raises the broader policy issue of whether the elaboration
of investment rules could proceed in a more consistent way through the establishment of adequate
interpretation mechanisms and institutions.
Clearly, the difficulties of interpretation and implementation created by the interaction of
an increasingly complex web of investment rules are particularly problematic for countries
suffering from insufficient human resource and institutional capacity to interpret and implement
EIIAs. Unclear and complex rules are likely to translate into lengthy and costly disputes and,
again, the most directly affected are likely to be the poorer countries. It is therefore crucially
important that countries engaging in the negotiation of an EIIA bear in mind these potential
difficulties and make provision for avoiding them. In particular, the provision of technical
cooperation to the less developed parties of an EIIA should be an important way of ensuring the
accomplishment of the EIIA's goals.
In the final analysis, the fundamental policy question becomes whether the proliferation
of EIIAs is likely to result in a large number of countries, especially the poorer countries, facing
discrimination and exclusion, or whether EIIAs can contribute to the global expansion of
investment flows through investment rules that are clear, predictable, consistent and fair. Some
existing implementation and interpretation arrangements are already contributing to the latter.
But more institutional efforts might still be needed in that direction. In sum, EIIAs are not a
substitute for the lack of a multilateral system in the area of investment — just as they are not a
substitute for the multilateral trading system established by the WTO — but, in the absence of
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Investment Provisions in Economic Integration Agreements
such a system, policymakers need to ensure that the expansion of EIIAs is supported by
institutional mechanisms that contribute to the elaboration of a clear, predictable, consistent and
fair framework of international investment rules for the benefit of all countries.